Proposed Carried Interest Regulations Are Back at OIRA for a Second LookAnchin AlertJune 5, 2020
The Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) has again received for review, proposed regulations with respect to section 1061— often referred to as the carried interest rules. The battle over carried interest continues as proposed rules are back at the OMB for review after the OMB initially signed off on them in late February 2020.
While this is not the first time proposed guidance has gone through additional rounds of OMB review, the reasons for this second round review of the carried interest rules are unknown. However, rumors and speculation abound, as we have been waiting for these regulations since the 2017 Tax Cuts and Jobs Act (TCJA) added the new section 1061 to the Code addressing the taxation of “applicable partnership interests” (API). To summarize, the provision requires that, to obtain long-term capital gain for APIs, the required asset-holding period must be greater than three years.
At tax conferences earlier this year, there were some hints at what may be included in the proposed regulations, although it’s possible some of those items may change due to the OMB’s second look. Some, but not all, of the issues that may be addressed in the proposed regulations are:
- Carry Waivers: Fund managers with carried interests considering whether to waive allocations that would be subject to higher tax rates by inserting “carry waivers” into partnership agreements so they could instead receive allocations that would qualify for the long-term capital gain rates. IRS officials have indicated that the proposed carried interest rules would apply principles similar to those it had applied to management fee waivers in proposed regulations issued in July 2015 under Section 707(a)(2)(A).
- API held directly or indirectly by a corporation: When TCJA was enacted, the almost- immediate consensus was that these new carried interest rules did not apply to an API held by a corporation (including an S corporation). The IRS seemed to quickly address this potential loophole by issuing Notice 2018-18 with officials indicating their plan to address this in the proposed regulations. However, some experts question whether the IRS has the authority to put this restriction in place through regulation, given that the TCJA did not include a limitation on the type of corporations that are exceptions from section 1061.
Please contact your Anchin Relationship Partner or any member of Anchin’s Financial Services Practice at your earliest convenience. We stand ready to help you plan effectively and to navigate through these new rules and reporting requirements. In the meantime, we will continue to update you as more information becomes available.